Treasury Yields Fall to 2011 Low, Stocks Retreat Following GDP

House Speaker John Boehner, a Republican from Ohio, speaks during a news conference on Capitol Hill in Washington, D.C., on July 28, 2011. Photographer: Andrew Harrer/Bloomberg

July 29 (Bloomberg) -- Treasuries rallied, sending yields
on 10-year notes to the lowest level since November, and stocks
fell as economic growth trailed forecasts amid speculation
lawmakers will reach a compromise to avoid a government default.
Gold settled at a record.

The yield on 10-year Treasury note yields declined 15 basis
points to 2.79 percent at 4 p.m. in New York, the lowest level
since Nov. 30. The Standard & Poor’s 500 Index slipped 0.7
percent and tumbled 3.9 percent this week for its worst slide in
a year. Gold futures settled 0.9 percent higher at $1,631.20 an
ounce to extend the biggest monthly gain since 2009. The Dollar
Index slipped 0.6 percent. Corn and wheat led the S&P GSCI Index
of commodities to a 1 percent decline.

The S&P 500 capped a third straight monthly drop, its
longest slump since 2008. Stocks trimmed early losses today as
lawmakers planned to vote on House Speaker John Boehner’s two-step borrowing-limit plan, and Republicans said it has enough
support to pass. President Barack Obama opposes the plan and
Senate Majority Leader Harry Reid, a Democrat, said he will move
to a vote on his competing plan while at the same time holding
out hope for a deal with Republican leaders.

“The economy appears to be almost at stall speed, which
means the politicians are playing with fire because any type of
event could push us into a recession,” Tim Hoyle, director of
research at Radnor, Pennsylvania-based Haverford Trust, said in
a telephone interview. The firm manages $6 billion. “Today’s
GDP number is a bigger concern to us as long-term investors than
when a bill is going to get passed in Congress, but this mess is
hurting business and consumer confidence.”

‘Rough Agreement’

Republicans were forced to scrap action on Boehner’s bill
last night. Today, Boehner told Republican senators that his
chamber will vote on the plan before 6 p.m. Washington time,
Senator Tom Coburn told reporters. Earlier, Obama said both
parties are in “rough agreement” on plans to raise the limit
with just four days before a threatened default. Obama said the
time for compromise is “now.”

Two-year Treasury yields decreased seven basis points to
0.36 percent, while the 30-year bond yield lost 13 points to
4.13 percent. Costs to protect U.S. debt from default snapped a
four-day increase, dropping two basis points to 62 basis points
after earlier surging to a more than two-year high, according to
data provider CMA.

The Treasury would delay quarterly auctions of U.S. notes
and bonds if there isn’t an extension of the nation’s debt
ceiling before next week’s scheduled announcement of the sales,
according to Morgan Stanley.

Bill Rates

Rates on $90 billion of six-month bills issued in February
that are due Aug. 4 surged seven basis points to 0.22 percent,
the highest level since they were issued.

The average rate for borrowing and lending Treasuries for
one day in the repurchase-agreement market jumped to 13.2 basis
points yesterday from nine basis points a day earlier, according
to index data provided by the Depository Trust & Clearing Corp.
The rate was 26.6 basis points on Aug. 2, 2010, the data show.

Amid the debt-ceiling debate, investors withdrew more from
money-market mutual funds than they have all year. Redemptions
reached $37.5 billion last week, with about 70 percent coming
from institutional funds that invest in U.S. government
securities, according to data from the Investment Company
Institute, a Washington-based trade group.

“The markets are having a hard time discounting the
possibility that politicians truly are insane,” Bruce McCain,
who helps oversee $22 billion as chief investment strategist at
the private-banking unit of KeyCorp in Cleveland, said in a
telephone interview. “One way or another they will do some
patchwork solution that kicks the can down the road on the debt
ceiling. We’ll be in a wait-and-see mode.”

July Slide

The S&P 500 extended its July loss to 2.2 percent, its
worst month since August. The standoff in Washington has
overshadowed an earnings season that has seen per-share profit
top analyst estimates at about 78 percent of the 305 companies
in the S&P 500 that released results since July 11, data
compiled by Bloomberg show. Net income has grown 19 percent and
sales have increased 14 percent for the group, the data show.

The S&P 500 plunged as much as 1.4 percent in the first
half hour of trading today as weaker-than-estimated 1.3 percent
growth in U.S. gross domestic product spurred concern the
recovery is in jeopardy as the budget stalemate threatens to
damage the economy further. Separately, the Institute for Supply
Management-Chicago Inc. said today its business barometer
decreased to 58.8 in July, lower than forecast, from 61.1 the
prior month. Figures greater than 50 signal expansion.

‘Still Struggling’

“The market is still struggling with the ineptness in
Washington,” Michael Strauss, who helps oversee about $27
billion as chief investment strategist at Commonfund in Wilton,
Connecticut, said in a telephone interview. “The weak economic
numbers will create jitters in the market, but it won’t change
that corporations are still outperforming.”

Before paring losses, a gauge of real-estate investment
trusts that buy mortgage debt tumbled the most intraday in more
than a year amid concern the markets that finance them will be
roiled if the U.S. government defaults on its debt. The
Bloomberg index of the shares of 32 mortgage REITs, including
Annaly Capital Management Inc. and Invesco Mortgage Capital
Inc., dropped as much as 8.5 percent, the most intraday since
May 6, 2010, before paring its drop to 2 percent by the close.

Energy and commodity producers led declines among all 10 of
the S&P 500’s main industry groups today, with Exxon Mobil Corp.
and Newmont Mining Corp. down more than 2 percent to pace
losses. Merck & Co. dropped 2.3 percent as the drugmaker said it
plans to slash its workforce by an additional 12 to 13 percent
by 2015.

European Stocks, Bonds

The Stoxx Europe 600 Index pared losses, decreasing 0.7
percent after losing as much as 1.8 percent. Veolia
Environnement SA plunged 9.5 percent as the world’s largest
water utility said it won’t meet its profit target. Vodafone
Group Plc jumped 4 percent after the largest mobile-phone
company announced a special dividend.

Spain’s 10-year bond yield increased six basis points to
6.04 after Moody’s Investors Service said it may cut its rating
on the country’s debt. The extra yield investors demand to hold
Spanish 10-year bonds instead of benchmark German bunds rose 14
basis points to 354 basis points, compared with a euro-era
record of 376 reached on July 12. Moody’s said it’s reviewing
Spain’s rating and a cut is likely to be “limited to one
notch.”

The cost of insuring European sovereign debt rose, with the
Markit iTraxx SovX Western Europe Index of default swaps rising
5.2 basis points to 269.5.

The S&P GSCI Index of commodities fell for a third
successive decline. Corn and wheat lost more than 2.5 percent to
lead declines. Gold, up 8.5 percent in July, had four straight
weekly advances.